December 8, 2023: Repo Madness: Q3 2023 Z.1

December 8, 2023: Repo Madness: Q3 2023 Z.1
Doug Noland Posted on December 9, 2023

Setting the stage for analysis of the Fed’s new Z.1, Q3 was not your typical quarter. For starters, GDP posted a 5.2% growth rate, more than doubling Q2’s 2.1%. Personal Consumption rose from 0.8% to 3.6%, with Gross Private Investment doubling to 10.5%.

It was a notably unsteady period for the markets. Strong July gains had the S&P500 trading to 15-month highs, with the Nasdaq100 late in the month reaching the highest level since January 2022. The loosening of market financial conditions accelerated, with spreads and many CDS prices back to pre-Fed “tightening” levels. Markets were volatile in August, with a meaningful tightening of financial conditions. Equities sold off sharply into quarter-end.

Bloomberg: “US Household Net Worth Falls on Drop in Value of Stock Holdings.” Z.1 report headlines focused on the decline in Net Worth, though much of the dip came near the end of the quarter. The Q4 rally has pushed perceived household wealth right back to record levels.

Financial conditions loosened sharply in November. Despite tighter bank lending and the potential for market de-risking/deleveraging, “risk on” markets have been notable for the degree of speculative fervor and liquidity abundance.

To the Z.1. Non-Financial Debt (NFD) expanded at a 5.24% annual rate, down from Q2’s 6.27%, but higher than Q3 2022’s 4.53%. It’s worth noting that annual NFD growth never reached 5.0% during the period 2009 through 2019. Total Household debt growth slowed from 2.71% to 2.52% during the quarter, with mortgage borrowings expanding 2.51% (down from 2.88%) and Consumer Credit slowing to 1.05% (from 2.08%).

For the second straight quarter, federal borrowings completely dominated NFD growth. At 10.60%, the growth in federal debt slowed from Q2’s 12.67%, but was more than double Q3 ‘22’s 4.19%.

In seasonally adjusted and annualized dollars (SAAR), NFD expanded $3.775 TN, down from Q2’s SAAR $4.445 TN, but ahead of Q3 ‘22’s $3.123 TN. Prior to pandemic 2020’s colossal $6.804 TN, 2007 held the annual record for NFD growth at $2.529 TN. For Q3, Household Debt expanded SAAR $495 billion and Business Debt SAAR $322 billion. Meanwhile, federal borrowing expanded SAAR $2.968 TN.

NFD ended the quarter at a record $72.950 TN, having expanded $3.297 TN over the past year, $7.964 TN over two years, and an incredible $17.802 TN, or 32.3%, during the past 15 quarters.

There are complex dynamics to ponder. Federal borrowing now dominates system Credit expansion. This perceived money-like debt enjoys insatiable demand, while providing the perfect instrument for levered speculation. Traditional sources of finance have tightened, with a notable pullback in bank lending, along with diminished corporate and household debt growth. Meanwhile, evidence of an ongoing historic expansion of speculative finance mounts, as suggested by the extraordinary expansion of “Repo” lending.

NFD expanded nominal $942 billion during Q3, with Treasury Securities gaining $901 billion, or 13% annualized, to a record $28.649 TN. Treasuries inflated $2.180 TN over the past year, with two-year growth of a staggering $4.399 TN, or 18.1%. Over 17 quarters, Treasuries ballooned $10.835 TN, or 60.8%. Since 2007, historic excess has seen Treasury growth of $22.598 TN, or 373%.

We cannot ignore the government-sponsored enterprises (GSEs). For the quarter, GSE Securities declined $70 billion (FHLB Assets contracted $50bn) to $11.902 TN. Still, GSE Securities expanded $460 billion, or 4.0%, over the past year, and $1.366 TN, or 13.0%, over the past seven quarters. GSE Securities ballooned an unprecedented $2.638 TN, or 28.5%, over 17 quarters.

In conspicuous government finance Bubble “blow-off” excess, combined Treasury and GSE Securities ballooned $2.640 TN over the past year, $5.766 TN over two years, and $13.473 TN (49.8%) over 17 quarters. At $40.551 TN, combined Treasury and GSE Securities ended September at 147% of GDP – up from 55% to end 2007.

Bank Assets contracted $132 billion during Q3 to $25.738 TN, led by a $260 billion drop in Debt Securities holdings (Agency/MBS down $193bn, Corporate Bonds $38bn, Munis $28bn). Bank Loans increased $95 billion, slightly lower than Q2’s $101 billion, and down big from Q3 ‘22’s $347 billion. Bank Loans expanded a respectable $640 billion y-o-y – which compares to the annual average of $363 billion for the two-decade period 2000 to 2019.

On the Liability side of the banking system’s balance sheet, Total (Checking and Time/Savings) Deposits contracted only $49 billion, down from Q3 ‘22’s $179 billion fall and the smallest decline since Q1 2022. Total Deposits dropped $696 billion y-o-y, or 3.3%, to $20.145 TN. Yet Total Deposits were still $4.611 TN, or 29.7%, higher over 15 quarters. Net Interbank Liabilities dropped $97 billion during Q3 to $632 billion.

Broker/Dealer Assets declined $52 billion from Q2’s record level to $4.757 TN. Debt Securities Holdings gained $30 billion to a 14-quarter high $435 billion, with Agency Securities jumping $34 billion to a 13-quarter high $121 billion (up $52.4bn y-o-y). “Repo Assets” fell $23 billion to $1.604 TN.

Over the past year, Broker/Dealer Assets inflated $333 billion (7.5%), with “Repo Assets” surging $274 billion, or 20.6%. Treasury holdings jumped $121 billion, with Agency/MBS Securities rising $52 billion. Loan Assets fell $171 billion to $635 billion. After beginning 2020 at $1.073 TN, Broker/Dealer Miscellaneous Assets ended September at $1.701 TN.

On the Liability side, “Repo” borrowings increased $13 billion during Q3 to a 13-year high $2.067 TN. Over the past year, “Repo” borrowings surged $454 billion, or 28.1%. It’s worth noting that Broker/Dealer “Repo” borrowings surged $326 billion, or 22%, (to $1.781 TN) in the five-quarter Q1 2018 through Q2 2019 period, leading up to summer 2019 repo market instability – and the Fed’s resumption of QE.

December 6 – Bloomberg (Greg Ritchie and William Shaw): “The Bank of England stepped up warnings about hedge funds shorting US Treasury futures, saying its measure of the net position is now larger than before the ‘dash for cash’ crisis in March 2020. The net short position has grown to $800 billion from about $650 billion in July, the central bank said, citing calculations based on Commodity Futures Trading Commission data. That suggests a jump in the so-called basis trade, which is where investors seek to exploit price differences between futures and bonds. The trade is particularly risky because returns are bolstered by borrowing money in the repo market.”

December 8 – Reuters (Jamie McGeever): “Hedge funds look to be scaling down their record short position in U.S. Treasury futures, marking the beginning of the end of the so-called ‘basis trade’ – an unwind that regulators have warned could pose severe financial stability risks… They ‘short’, or sell the bond future, and go ‘long’, or buy the cash bond. The trade is funded in overnight repo markets and highly leveraged. If the unwind is now underway, the question for authorities – and financial markets at large – is whether the $1 trillion position can be unwound in an orderly manner.”

Shorting Treasury futures is associated with only a slice of global speculative leverage. Yet the recent surge from $650 billion to $800 billion – or even $1 TN – is indicative of a general surge in leveraged speculation. I’ve always assumed much of Treasury/Agency speculation transpires in offshore “tax havens” (i.e., Cayman Islands, Luxembourg, Singapore). It’s unclear how offshore financial flows and leverage impact Fed Z.1 data.

Total System “Repo” Assets declined $222 billion during the quarter to $7.468 TN. Behind the decline, the Fed’s “Repo” Liability dropped $506 during Q3 to a nine-quarter low $1.863 TN – with a one-year contraction of $857 billion. But over 15 quarters, system “Repo” Assets ballooned $2.395 TN, or 47.2%.

Interestingly, Rest of World (ROW) “Repo” borrowings jumped another $158 billion (second only to Q1 ’19) during the quarter to a record $1.576 TN, with unprecedented one-year growth of $455 billion, or 40.6%. For perspective, ROW “Repo” borrowings expanded an annual record $232 billion during 2019. ROW “Repo” borrowings jumped a then record $186 billion in 2006, only to collapse $368 billion during 2008’s chaotic second-half (to $402bn). Over the past five years, ROW “Repo” has ballooned $736 billion, or 88%.

ROW holdings of U.S. Assets declined $839 billion during Q3 to $44.531 TN, of which $468 billion resulted from the drop in Equities holdings (price declines). Debt Securities holdings fell $214 billion to $12.823 TN, reducing one-year growth to $530 billion. Over the past year, ROW holdings of Treasuries jumped $265 billion (to $7.516 TN), Agency Securities $78 billion ($1.256 TN), U.S. Corporate Debt $198 billion ($3.780 TN), and Equities $1.615 TN ($11.927 TN). ROW Assets ballooned $8.568 TN, or 26.2%, over 13 quarters, and $30.523 TN, or 218%, since 2008.

The largest holders of “Repos,” the money market fund complex, saw assets expand another $226 billion during Q3 to a record $6.143 TN. Money Fund Assets ballooned $1.059 TN, or 20.8%, over the past four quarters, and $2.141 TN, or 44.9%, during the past 15 quarters. At $729 billion, 2007’s annual record for growth in Money Fund Assets is about to be broken.

Money Fund “Repo” holdings contracted $284 billion during Q3 to $2.949 TN. “Repo” holdings were up $205 billion y-o-y and $1.706 TN, or 160%, over 15 quarters. Holdings of Treasuries (t-bills) surged $523 billion during the quarter to $1.767 TN. Holdings of Agency Securities declined $64 billion during Q3 to $690 billion, but were up $198 billion, or 40.2%, y-o-y.

The quarter ended with 48% of Money Fund Assets invested in “Repo”, 5% in Open Market Paper (commercial paper), 29% in Treasuries, and 11% in Agency Securities. For comparison, these ratios were 17%, 26%, 4%, and 6% at the end of 2006. I’ll assume regulators recognize that the Money Fund complex is now at the heart of operations financing government financial Bubble speculative excess.

Total Debt Securities increased $770 billion during the quarter to a record $61.105 TN, with one-year growth of $3.062 TN. Debt Securities ballooned $15.360 TN, or 33.6%, over the past 17 quarters. Equities dropped $2.792 TN to $70.100 TN, with a one-year gain of $9.083 TN (14.9%) and a 17-quarter surge of $19.333 TN (38.1%). Total (Debt and Equities) Securities ended Q3 at $131.206 TN, or 475% of GDP. This compares to previous cycle peaks 387% (Q3 ’07) and 368% (Q1 2000). With equities poised to gain upwards of $7 TN of market capitalization this quarter, ratios will only become more stretched.

The Household balance sheet is always central to Bubble Analysis. While declining $1.162 TN for the quarter to $171.266 TN, Household Assets were up $8.739 TN over four quarters. And with Liabilities gaining $574 billion y-o-y, Household Net Worth inflated $8.165 TN over the past year to $150.989 TN. Integral to the ongoing economic expansion, Net Worth inflated $37.722 TN, or 33.3%, over the past four years. At 546% (and going higher), Household Net Worth-to-GDP compares to previous cycle peaks 488% (Q1 ’07) and 444% (Q1 2000).

Household Financial Asset holdings jumped $6.433 TN over the past year to $112.424 TN, with Total Equities rising $4.576 TN to $39.088 TN. At 407%, Household Financial Asset holdings-to-GDP compares to previous cycle peaks 373% (Q3 ’07) and 354% (Q1 2000). Real Estate holdings gained $469 billion for the quarter to surpass $50 TN for the first time. Real Estate holdings jumped $1.971 TN y-o-y and $17.003 TN, or 51.4% over the past four years.

Household combined holdings of Deposits, Money Market Funds, and Treasury & Agency Securities increased $157 billion during Q3 to a record $21.304 TN. These holdings were up $1.123 TN y-o-y and $6.025 TN, or 39.4%, over the past four years.

Federal Reserve Assets dropped $589 billion during Q3 to $6.731 TN, with a one-year decline of $932 billion. Treasury holdings were down $819 billion y-o-y to $4.367 TN, with Agency Securities dropping $295 billion to $2.026 TN. Federal Reserve Liabilities declined $301 billion during Q3 and $756 billion y-o-y to $7.995 TN. After closing 2021 with positive “equity” of $164 billion (Assets of $8.911 TN less Liabilities of $8.747 TN), the Fed ended September with an unprecedented $1.264 TN deficit ($6.731 TN less $7.995 TN).

While the Fed has helped shield the markets from losses on Treasury and Agency securities, I wonder if the trillion-dollar hole in the Federal Reserve balance sheet will inhibit the next major QE program.

December 8 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers said the Federal Reserve should hold off on a shift toward lowering interest rates until there’s decisive evidence showing that inflation is back under control or that the economy is entering a slump. ‘The moment they turn, or announce they’re going to turn, is going to be a seismic moment… And for that reason, they probably need to be very deliberative and careful about getting to that point…’ ‘These [payrolls data] were good numbers — they showed an economy that, at least as of November, was still looking pretty robust,’ Summers said. The acceleration in wages ‘reinforces my sense that people need to be careful about declaring the war against inflation as having been won.’”

FOMC officials will next week update their Summaries of Economic Projections (“dot plot”). They would be wise to avoid feeding the rate cut frenzy. It’s interesting. The marketplace is fixated on “soft landings” and the next easing cycle. Meanwhile, history’s greatest speculative Bubble just continues to inflate seemingly without a care in the world.

The recent dramatic loosening of financial conditions is problematic on multiple levels. The almost 10-point pop in the preliminary December reading of University of Michigan Consumer Expectations is early evidence of the impact of loosening. And markets snickered at Powell’s perfunctory push back. It’s time for the Fed Chair to sideline abiding “Balanced Powell” – to show some gumption and regain control of the narrative.

For the Week:

The S&P500 added 0.2% (up 19.9% y-t-d), while the Dow was unchanged (up 9.4%). The Utilities slipped 0.3% (down 12.6%). The Banks advanced 1.6% (down 12.1%), and the Broker/Dealers surged 3.2% (up 15.7%). The Transports fell 1.6% (up 13.6%). The S&P 400 Midcaps increased 0.2% (up 8.3%), and the small cap Russell 2000 gained 1.0% (up 6.8%). The Nasdaq100 added 0.5% (up 47.0%). The Semiconductors rose 1.0% (up 49.1%). The Biotechs gained 0.7% (down 6.2%). With bullion dropping $68, the HUI gold equities index sank 6.4% (down 0.1%).

Three-month Treasury bill rates ended the week at 5.2175%. Two-year government yields jumped 18 bps this week to 4.72% (up 29bps y-t-d). Five-year T-note yields rose 12 bps to 4.24% (up 23bps). Ten-year Treasury yields increased three bps to 4.23% (up 35bps). Long bond yields declined eight bps to 4.305% (up 34bps). Benchmark Fannie Mae MBS yields increased two bps to 5.71% (up 32bps).

Italian yields slipped three bps to 4.07% (down 63bps). Greek 10-year yields dropped 13 bps to 3.44% (down 112bps y-t-d). Spain’s 10-year yields declined six bps to 3.30% (down 21bps). German bund yields fell nine bps to 2.28% (down 28bps). French yields dropped 10 bps to 2.83% (down 15bps). The French to German 10-year bond spread narrowed about one to 55 bps. U.K. 10-year gilt yields fell 10 bps to 4.04% (up 37bps). U.K.’s FTSE equities index increased 0.3% (up 1.4% y-t-d).

Japan’s Nikkei Equities Index dropped 3.4% (up 23.8% y-t-d). Japanese 10-year “JGB” yields jumped seven bps to 0.77% (up 34bps y-t-d). France’s CAC40 jumped 2.5% (up 16.3%). The German DAX equities index rose 2.2% (up 20.4%). Spain’s IBEX 35 equities index increased 0.8% (up 24.2%). Italy’s FTSE MIB index gained 1.6% (up 28.2%). EM equities were mixed. Brazil’s Bovespa index declined 0.9% (up 15.8%), while Mexico’s Bolsa index gained 0.9% (up 12.2%). South Korea’s Kospi index increased 0.5% (up 12.6%). India’s Sensex equities index rose 3.5% (up 14.8%). China’s Shanghai Exchange Index dropped 2.0% (down 3.9%). Turkey’s Borsa Istanbul National 100 index lost 1.4% (up 43.6%). Russia’s MICEX equities index fell 2.0% (up 43.0%).

Federal Reserve Credit dropped $71.5bn last week to $7.697 TN. Fed Credit was down $1.204 TN from the June 22nd, 2022, peak. Over the past 221 weeks, Fed Credit expanded $3.971 TN, or 107%. Fed Credit inflated $4.886 TN, or 174%, over the past 578 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $10.9bn last week to a seven-month low of $3.386 TN. “Custody holdings” were up $79bn, or 2.4%, y-o-y.

Total money market fund assets jumped $62bn to a record $5.898 TN, with a 39-week gain of $1.004 TN (27% annualized). Money funds were up $1.227 TN, or 26.3%, y-o-y.

Total Commercial Paper dropped $24.0bn to $1.251 TN. CP was down $67bn, or 5.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 27 bps to a 19-week low 6.80% (up 52bps y-o-y). Fifteen-year rates dropped 26 bps to 6.27% (up 59bps). Five-year hybrid ARM rates fell 11 bps to 6.64% (up 117bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 7.48% (up 85bps).

Currency Watch:

December 5 – Bloomberg: “China ramped up its support for the yuan via the daily reference rate, as market sentiment took a hit after Moody’s… cut its credit outlook for the nation. The PBOC set the daily reference rate for the managed currency at 7.1140 per dollar, versus an average estimate at 7.1486… The gap between the two was the largest in more than two weeks, a sign that Beijing is boosting its efforts to prevent declines in the Chinese currency.”

For the week, the U.S. Dollar Index gained 0.7% 104.01 (up 0.5% y-t-d). For the week on the upside, the Japanese yen increased 1.3%. On the downside, the Norwegian krone declined 2.1%, the South African rand 1.6%, the Australian dollar 1.4%, the New Zealand dollar 1.4%, the British pound 1.3%, the Swiss franc 1.2%, the euro 1.1%, the Brazilian real 1.0%, the Mexican peso 0.9%, the Swedish krona 0.9%, the Singapore dollar 0.6%, the Canadian dollar 0.6%, and the South Korean won 0.1%. The Chinese (onshore) renminbi declined 0.58% versus the dollar (down 3.79%).

Commodities Watch:

December 5 – Reuters (Casey Hall and Amy Lv): “Gold buyers in China are getting younger, as a property market downturn, weakening stocks and currency and low bank deposit interest rates have left them with dwindling options to save for rainy days in a sputtering economy. The trend underscores heightening uncertainty about growth prospects in the world’s second-largest economy… ‘The employment market has not been very good,’ said Linda Liu, 26, who works for a pharmaceuticals company in Beijing, but worries about job stability. ‘Buying gold makes me feel better.’ ‘I want gold jewellery instead of diamonds for my wedding.’ China is the world’s top buyer of physical gold and analysts say this year it has been an increasingly important driver behind a rally in global spot gold prices , which hit all-time highs on Monday.”

The Bloomberg Commodities Index dropped 3.6% (down 13.2% y-t-d). Spot Gold fell 3.3% to $2,005 (up 9.9%). Silver sank 9.8% to $23.00 (down 4.0%). WTI crude fell $2.84, or 3.8%, to $71.23 (down 11.3%). Gasoline dropped 3.4% (down 17%), and Natural Gas sank 8.3% to $2.58 (down 42%). Copper fell 2.6% (up 1%). Wheat rallied 6.6% (down 22%), and Corn increased 0.3% (down 31%). Bitcoin jumped $5,440, or 14%, to $44,154 (up 166%).

Middle East War Watch:

December 6 – Bloomberg (Michelle Nichols): “United Nations Secretary-General Antonio Guterres made a rare move… to formally warn the Security Council of a global threat from the Gaza war as Arab states seek to leverage that to push the council to call for a ceasefire within days. The United Arab Emirates gave the council a brief draft resolution… that would act on the letter from Guterres by demanding an ‘immediate humanitarian ceasefire’ in the conflict between Israel and Palestinian militants Hamas.”

December 3 – Financial Times (Oliver Telling, Samer Al-Atrush and Alex Rogers): “A US warship and three commercial vessels came under attack in the Red Sea on Sunday, according to the Pentagon, in a potential escalation of the fallout from Israel’s conflict with Hamas in a vital trade corridor. The US defence department cited reports of strikes on commercial ships and the USS Carney… The Houthis, an Iran-backed rebel group that controls part of Yemen, separately claimed responsibility for targeting two ships with a drone and missile. The group claimed the ships were linked to Israel.”

December 6 – Reuters (Aziz El Yaakoubi and Parisa Hafezi): “Saudi Arabia has asked the United States to show restraint in responding to attacks by Yemen’s Houthis against ships in the Red Sea, two sources familiar… said, as Riyadh seeks to contain spillover from the Hamas-Israel war. The Iran-aligned Houthis have waded into the conflict that has spread around the Middle East since war erupted on Oct. 7, attacking vessels in vital shipping lanes and firing drones and missiles at Israel itself.”

Ukraine War Watch:

December 8 – Bloomberg (Erik Wasson): “Ultraconservatives in the US House warned new Speaker Mike Johnson that any attempt to pass Ukraine aid before the US stems migrant crossings at its southern border would foment a rebellion on his right flank. The hardline House Freedom Caucus stopped short Friday of explicitly threatening Johnson’s job, but their statement further imperils the bipartisan push to send $66 billion in fresh military and humanitarian aid to Ukraine.”

Market Instability Watch:

December 5 – Bloomberg (Alexandra Harris): “Spikes in a key short-term interest rate are raising eyebrows in the arcane-but-vital overnight funding market, drawing unsettling comparisons with turmoil that rocked the space more than four years ago. Strains started showing up late last week. The bond-buying frenzy that stoked November’s US debt rally led to a surge in demand for financing in the market for repurchase agreements, where participants engage in short-term lending or borrowing that’s collateralized by government securities. This led to a large jump in short-term rates on the final trading day of November, with yields on overnight general collateral repo soaring above 5.5%. Even more unusual, the elevated levels persisted as December began.”

December 4 – Financial Times (Nathan Sheets): “US fiscal performance has reached new depths of dysfunction. In recent months, the country has endured a stressful debt-ceiling episode, Fitch has downgraded the US sovereign credit rating and the risk of a government shutdown remains on the table. Equally concerning, the federal government is swimming in a sea of red ink, with budget deficits near 6% of gross domestic product likely in the years ahead. As a result, the government’s debt is poised to rise to 115% of gross domestic product over the next decade, surpassing its peak after the second world war… On reasonable estimates, the Treasury will need to issue $20tn of debt in the coming decade.”

December 5 – Reuters (Saqib Iqbal Ahmed): “An epic rally in U.S. stocks has sent Wall Street’s fear gauge to a post-pandemic low. Options strategists believe market gyrations may stay subdued for some time – potentially smoothing the way for further gains in equities. The Cboe Volatility Index… is hovering just above that low of 12.45 hit late last month, in contrast with a long-term average level of about 20. Among the factors closely watched by market participants are the funds that take their signals from market volatility, selling when volatility picks up and buying when it subsides. As market gyrations have calmed, these volatility-targeting funds have become buyers of U.S. equities, sucking up some $30 billion worth of purchases in the week ended Nov. 30, according to data from Nomura Securities.”

December 5 – Bloomberg (Sagarika Jaisinghani and Thyagaraju Adinarayan): “The message coming from Wall Street is that investor optimism is running dangerously high. Overstretched technicals and the belief that the Federal Reserve won’t cut interest rates as quickly as markets expect are driving a sudden pessimistic turn from equity specialists at JPMorgan… and Morgan Stanley. As Goldman Sachs… Managing Director Scott Rubner put it in a report, there are ‘no longer any bears left.’”

December 6 – Financial Times (Laura Noonan): “Private credit and leveraged lending markets remain vulnerable to ‘sharp revaluations’, the Bank of England warned…, in its latest attempt to sound alarm bells about risks building up in non-bank finance. The BoE’s financial stability watchdog said that despite some recent improvements in market conditions, the two sectors appeared ‘particularly vulnerable’ as war in the Middle East adds to geopolitical risks. ‘Although there are few signs of stress in these markets so far, a worsening macroeconomic outlook could . . . cause sharp revaluations of credit risks,’ the BoE’s Financial Policy Committee wrote in its quarterly update, adding that valuations appeared ‘stretched . . . particularly in the US’.”

December 7 – Bloomberg (Tatiana Darie): “A major risk to US credit is that the BOJ starts to tighten policy before the Fed cuts. Japanese investors are among the biggest foreign holders of corporate bonds among other US debt, and markets like CLOs have become increasingly dependent on Japanese investors for deals. If these investors start repatriating funds, it would leave fewer buyers for bonds at a time when defaults are rising as the economy is heading into a slowdown too. Both risks are being overlooked by investors. The good news is that we’re not there yet. Japanese investors are still buying.”
December 4 – Bloomberg (Greg Ritchie and Liz Capo McCormick): “Central clearinghouses that hold over $1 trillion in liquid assets may exacerbate periods of financial stress, creating ‘margin spirals’ that can push down asset prices, according… the Bank for International Settlements. The researchers focused on the impact when the central counterparty clearinghouses, known as CCPs, increase initial margin requirements for its members during times of stress. This may lead to ‘fire sales’ in cash and derivative markets as investors dump assets to raise the needed funds, increasing volatility further and triggering additional rounds of margin calls, the paper notes.”

Bubble and Mania Watch:

December 7 – Associated Press (Adam Beam): “California is facing a record $68 billion budget deficit, state officials announced Thursday, forcing hard choices for Democratic Gov. Gavin Newsom in his final term as he works to build his national profile. The nation’s most populous state — with an economy that is the fifth largest in the world — has been struggling since last year because of the rising prices of most goods and services and how the U.S. government has been trying to control it.”

December 5 – Bloomberg (Silla Brush): “BlackRock Inc. Chief Financial Officer Martin Small said investors are beginning to pour more money into riskier assets, recognizing the central bank’s tightening cycle is ending and choosing to re-allocate their portfolios. ‘You’ve seen a decidedly more positive tone and sentiment in markets that I’m very optimistic will carry into 2024,’ Small said… ‘We see it in some of the flows data.’ BlackRock brought in about $54 billion of net client money into its exchange-traded funds in October and November…”

December 5 – Bloomberg (Jacqueline Poh): “The real estate and construction sectors, burdened with commercial vacancies and unsold residential properties, have about $650 billion of loans and bonds globally due next year. Almost half the tally is from the Asia-Pacific, where developers are trying to extend debt payments and the troubles have hurt the credit outlook for China.”

December 7 – New York Times (Erin Griffith): “WeWork raised more than $11 billion in funding as a private company. Olive AI, a health care start-up, gathered $852 million. Convoy, a freight start-up, raised $900 million. And Veev, a home construction start-up, amassed $647 million. In the last six weeks, they all filed for bankruptcy or shut down. They are the most recent failures in a tech start-up collapse that investors say is only beginning. After staving off mass failure by cutting costs over the past two years, many once-promising tech companies are now on the verge of running out of time and money. They face a harsh reality: Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.”

December 6 – Bloomberg (Allison McNeely): “Apollo Global Management Inc.’s chief executive officer said the business of making leveraged loans to companies is in its ‘late innings’ as regulators crack down on banks and private credit continues to grow. ‘When they ask the banking system to put up 15% or 20% more capital, they’re telling the banking system to shrink,’ Marc Rowan said… When Europe unveiled new capital requirements, ‘they’re telling the banks to shrink,’ he added. ‘And we’re seeing this everywhere in the world, so debanking is at the early stages.’”

December 4 – Bloomberg (Jeran Wittenstein): “While corporate insiders are increasingly betting on shares of their own firms, bosses at the S&P 500’s best-performing company are cashing in. Nvidia Corp. executives and directors last month sold or filed paperwork showing they intend to sell roughly 370,000 shares worth about $180 million…”

December 4 – Bloomberg (Ben Stupples): “Mark Zuckerberg is selling Meta Platforms Inc. stock for the first time in two years after the social media giant rapidly rebounded from a tumultuous 2022. The Meta co-founder’s trust as well as entities for his charitable and political giving unloaded about 682,000 shares worth almost $185 million in November through trading plans…”

December 7 – Reuters (Suzanne McGee): “There have already been 478 new exchange-traded funds (ETFs) launched in the U.S. this year…, a new annual record, according to… Morningstar… The previous record was set in 2021, when ETF managers rolled out 477 new funds. Last year, quiet by comparison, was still the second-busiest ever, with 407 ETF debuts.”

Banking Watch:

December 6 – Reuters (Pete Schroeder and Nupur Anand): “U.S. bank supervisors are increasing scrutiny of lenders’ risk management practices and taking disciplinary action as they try to fix problems that could lead to more bank failures, banking industry sources said. The changes follow the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year… After official reviews found frontline examiners failed to act quickly upon spotting problems, they are taking a tougher, more proactive approach. Interviews with a dozen industry executives, lawyers and regulatory officials show examiners are executing surprise reviews of a key confidential supervisory bank health rating and in some cases have issued downgrades. They are increasingly warning big banks they will be placed under an order restricting a range of activities if they don’t fix lapses…”

December 6 – Associated Press (Ken Sweet): “The heads of Wall Street’s biggest banks used an appearance on Capitol Hill on Wednesday to plead with senators to stop the Biden administration’s proposed changes to how banks are regulated, warning that the new proposals could negatively impact the economy at a time of geopolitical turmoil and inflation. Wall Street’s most powerful bankers have regularly appeared in front of Congress going back to the 2008 financial crisis. Among those testifying before the Senate Banking Committee included JPMorgan’s Jamie Dimon, Bank of America’s Brian Moynihan, Jane Fraser of Citigroup and Goldman Sachs’ David Solomon. Whereas in previous years the bank CEOs used the hearing to highlight the industry’s good deeds, this year they warned about the potential dangers of over-regulating the industry.”

U.S./Russia/China/Europe Watch:

December 4 – Reuters (Bernard Orr): “China’s military… said a U.S. Navy ship illegally entered waters adjacent to the Second Thomas Shoal, a disputed South China Sea atoll that has recently seen several maritime confrontations. ‘The U.S. seriously undermined regional peace and stability,’ a spokesperson for China’s Southern Theater of Operations said…, adding that the U.S. disrupted the South China Sea and violated China’s sovereignty.”

December 7 – Reuters (Ellen Zhang and Ryan Woo): “China-Russia trade hit $218.2 billion during January-November…, achieving the goal that had been set by the two countries in 2019 a year ahead of schedule. The two-way trade value in the first 11 months also surpassed the total for all of 2022…, securing 2023 a year to witness new record high of bilateral trade.”

De-globalization and Iron Curtain Watch:

December 6 – Reuters (Aziz El Yaakoubi and Vladimir Soldatkin): “Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman discussed further cooperation on oil prices on Wednesday as members of OPEC+… A Saudi account of the meeting said the crown prince praised joint coordination between the two countries ‘that helped remove tensions in Middle East’. Putin and the crown prince, de facto ruler of the world’s largest crude exporter, had the hastily arranged talks hours after the Kremlin leader visited Saudi Arabia’s Gulf neighbour, the United Arab Emirates.”

Inflation Watch:

December 7 – Wall Street Journal (Erin Mulvaney): “A turbulent economy has slowed demand for law firms. You wouldn’t know it from what they are paying for top talent. Elite firms are in a financial arms race to attract and retain lawyers who bring in big books of business, shelling out millions to poach star partners and in some cases entire practice groups. And as 2023 comes to a close, some notable firms have sparked a salary run, publicly announcing compensation hikes for their attorneys at the associate level, where future stars are born.”

Biden Administration Watch:

December 7 – Reuters (Jonathan Landay): “The United States believes that Iran is involved in the planning and execution of drone and missile attacks by Yemen’s Houthi group on Israel and ships in the Red Sea, a senior aide to U.S. President Joe Biden said… The comments by deputy White House national security adviser Jon Finer are among the most explicit to date by a U.S. official alleging Iranian involvement in the Houthi attacks… The Houthis ‘would not have the weaponry, would not have the intelligence, would not have the motivation to do this, were it not for the role of the IRGC,’ Finer told an Aspen Security Forum conference…”

Federal Reserve Watch:

December 5 – Bloomberg (Philip Aldrick): “The US Federal Reserve is losing control of its messaging on interest rates, but financial markets are wrong to expect imminent cuts, Allianz Chief Economic Adviser Mohamed El-Erian said… El-Erian warned that the Fed needs to recover its credibility on forward guidance with the markets or the recent ‘tremendous loosening of financial conditions’ will undermine its policy. ‘I do believe the Fed is done raising rates, but I don’t think that validates what is in the markets about rate cuts next year,’ he said. ‘They still have a significant communication problem and they still have a credibility problem.’”

U.S. Bubble Watch:

December 8 – CNBC (Jeff Cox): “Job creation showed little signs of a letup in November, as payrolls grew even faster than expected and the unemployment rate fell despite signs of a weakening economy. Nonfarm payrolls rose by a seasonally adjusted 199,000 for the month, slightly better than the 190,000… estimate and ahead of the unrevised October gain of 150,000… The unemployment rate declined to 3.7%, compared with the forecast for 3.9%, as the labor force participation rate edged higher to 62.8%… The department’s survey of households… showed much more robust job growth of 747,000 and an addition of 532,000 workers to the labor force. Average hourly earnings… increased by 0.4% for the month and 4% from a year ago.”

December 6 – CNBC (Jeff Cox): “Private sector job creation slowed further in November and wages showed their smallest growth in more than two years, payrolls processing firm ADP reported… Companies added just 103,000 workers for the month, slightly below the downwardly revised 106,000 in October and missing the 128,000… estimate. Along with the modest job growth came a 5.6% increase in annual pay, which ADP said was the smallest gain since September 2021. Job-changers saw wage increases of 8.3%, making the premium for switching positions the lowest since ADP began tracking the data three years ago.”

December 5 – Reuters (Lucia Mutikani): “U.S. job openings fell to more than a 2-1/2-year low in October, the strongest sign yet that higher interest rates were dampening demand for workers, and boosting financial markets expectations the Federal Reserve’s monetary policy tightening cycle was over. The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS report… also showed that there were 1.34 vacancies for every unemployed person in October, the lowest since August 2021 and down from 1.47 in September. …”

December 7 – Reuters (Lindsay Dunsmuir): “U.S. employers increased their announced job cuts in November, led by the retail and technology sectors, in a further sign that the labor market is beginning to slacken… Announced job layoffs by U.S.-based employers totaled 45,510 last month, up 24% from 38,836 in October, global outplacement firm Challenger, Gray & Christmas said… While it was the first time since July the announced cuts were lower than the corresponding month a year ago, the year-to-date tally was the highest since 2020…”

December 4 – Wall Street Journal (Kate Bronfenbrenner): “2023 was a remarkable year for the U.S. labor movement. The country experienced a surge in strikes unlike anything in recent memory. According to Cornell ILR’s Labor Action Tracker, as of Oct. 31, there were 354 strikes in 2023 involving roughly 492,000 workers—nearly eight times the number of workers involved in strikes for the same period in 2021 and nearly four times the number for the same period 2022. Not only were there more strikes, they led to historic companywide and industrywide bargaining victories with some of the nation’s largest and most powerful corporations—United Parcel Service, Kaiser Permanente, Hollywood, the big three auto-companies, and hotels and casinos in Los Angeles, Las Vegas and Detroit.”

December 5 – Bloomberg (Augusta Saraiva): “The US service sector expanded at a faster pace in November as business activity and employment picked up. The Institute for Supply Management’s overall gauge of services rose 0.9 points to 52.7 last month… The index has remained above the 50 level that indicates expansion for all of this year, and has only dipped into contraction once since the onset of the pandemic. The business activity index… climbed in November after posting the biggest drop this year in the prior month. A gauge of orders placed with service providers — a proxy of future demand — was unchanged at 55.5.”

December 8 – Bloomberg (Vince Golle): “US consumer sentiment rebounded sharply in early December, topping all forecasts as households dialed back their year-ahead inflation expectations by the most in 22 years. The University of Michigan’s consumer sentiment index jumped 8.1 points to a four-month high of 69.4, the preliminary December reading showed. The median estimate in a Bloomberg survey of economists called for the gauge to edge up to 62. Consumers see prices rising at an annual rate of 3.1% over the coming year, the lowest level since March 2021.”

December 6 – Bloomberg (Augusta Saraiva): “US mortgage rates fell to the lowest level in almost four months last week, spurring the biggest demand for refinancing since February. The contract rate on a 30-year fixed mortgage decreased 20 bps to 7.17% in the week ended Dec. 1, according to the Mortgage Bankers Association. The rate has fallen 69 bps in the last five weeks, the biggest drop over such a time period since late 2008. Refinancing activity jumped nearly 14%… Purchasing activity ticked down slightly, but still hovered near the highest level since mid-September.”

December 4 – Yahoo Finance (Gabriella Cruz-Martinez): “Mortgage rates are pulling back from 8%, a seemingly promising sign for sidelined buyers. But further declines could unleash pent-up demand. ‘If rates fall below 7%, I think we’re going have a surprisingly strong year,’ Daryl Fairweather, chief economist at Redfin, told Yahoo… ‘That’s when I think we’re going to see more people out there with bidding wars… Rates going up to nearly 8% has reset the threshold for buyers wanting to get back into the market’.”

December 4 – Yahoo Finance (Seana Smith): “Surging mortgage rates and record-high home prices are no longer sidelining potential buyers. Instead, house hunters are ‘losing patience’ and moving forward with their goal of owning a home, Bank of America’s Matt Vernon told Yahoo Finance Live. ‘The dream of homeownership is alive and well,’ said Vernon, head of consumer lending at Bank of America. As of October, more than a third of prospective homebuyers are no longer willing to wait for home prices and interest rates to fall to buy a home, up from 15% in April, according to Bank of America’s Homebuyers Insight Report.”

December 4 – Bloomberg (Ethan M Steinberg): “Plunging US home sales are having a ripple effect on consumer spending, as fewer Americans are moving into houses that need to be outfitted with furniture and appliances. The effects are visible across the economy. Spending on furniture and related items fell nearly 12% from the year-earlier period in October. Home goods sellers including Z Gallerie and Serta Simmons Bedding have filed for bankruptcy this year, citing weaker demand… Williams-Sonoma Inc.’s chief executive said last month that consumers are hesitant to spend on expensive furniture. Home Depot Inc., the hardware and appliance store, said its revenue will likely drop this fiscal year.”

December 4 – Reuters (Lindsay Dunsmuir): “New orders for U.S.-made goods fell more than expected in October, marking the biggest monthly drop in roughly three and a half years, constrained by weakening demand for durable goods and transportation equipment… Factory orders fell 3.6% after a downwardly revised 2.3% in September…, the biggest monthly drop since April 2020.”

December 5 – Financial Times (Anna Mutoh): “A surge in the number of Americans choosing ‘buy now, pay later’ payment methods for their holiday shopping is raising concerns among advocacy groups that many lower-income consumers will find themselves struggling to pay their bills in the new year. Usage of the modern-day layaway plan — in which payments are typically made in instalments with no interest except to the merchant — has hit an all-time high this holiday season. BNPL contributed to $10.1bn of online spending since the start of November, up 17% from the same period of 2022, Adobe Analytics calculated. The payment methods are gaining in popularity as US household savings fall below levels recorded before they were boosted by government stimulus during the Covid-19 pandemic.”

Fixed Income Watch:

December 6 – Financial Times (Harriet Clarfelt): “Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months… Corporate borrowers in the US and Europe issued $246bn worth of investment-grade and junk bonds in November alone — 57% more than October’s total, and $16bn higher than the average figure for the first 10 months of the year, according to… LSEG. The flurry of issuance has continued this week, with highly rated borrowers including General Motors Financial, phosphate producer Mosaic and telecoms tower owner Crown Castle announcing fresh deals.”

China Watch:

December 8 – Bloomberg: “China’s top leaders pledged to strengthen fiscal support and emphasized the importance of economic ‘progress’ at a meeting Friday that supported economists’ expectations for a growth goal of around 5% for next year. The Politburo, comprising the ruling Communist Party’s top 24 officials and chaired by President Xi Jinping, announced after the gathering that fiscal policy will be stepped up ‘appropriately’…”

December 5 – New York Times (Keith Bradsher and Joy Dong): “In his decade as China’s top leader, Xi Jinping has asserted greater control for himself and the Communist Party over the country’s economy. Now, Mr. Xi has moved to extend that power more forcefully than ever over China’s financial system. The Communist Party issued a detailed ideological statement on Friday in Qiushi, the party’s main official theoretical journal, that made clear that it expected banks, pension funds, insurers and other financial organizations in China to follow Marxist principles and pay obedience to Mr. Xi. The Qiushi paper, which was being closely studied by bankers and economists in China, could cut against efforts by Beijing to show that the economy is open to investment even as it places a heavier hand on business.”

December 4 – Bloomberg: “China’s central bank governor pledged to keep the growth of money supply in check and offer better support to key sectors including technology and advanced manufacturing, illustrating the nation’s focus on enhancing the quality of credit. Pan Gongsheng reaffirmed that the People’s Bank of China will ‘control the monetary sluice’ in an article in the People’s Daily… that laid out the central bank’s priorities in response to a recent twice-a-decade financial policy meeting. Officials have used the language in the past to underscore the PBOC’s desire to avoid massive easing leading to a rapid buildup of debt.”

December 5 – Reuters (Gnaneshwar Rajan, Shristi Achar A, Kevin Yao, Marc Jones and Lewis Krauskopf): “Ratings agency Moody’s slapped a downgrade warning on China’s credit rating…, saying costs to bail out local governments and state firms and control its property crisis would weigh on the world’s No. 2 economy. Moody’s lowered the ‘outlook’ on China’s A1 debt rating to ‘negative’ from ‘stable’ less than a month after it had done the same to the United States’ last remaining triple-A grade from a credit rating agency… Beijing likely needs to provide more support for debt-laden local governments and state firms which pose ‘broad downside risks to China’s fiscal, economic and institutional strength,’ it added. Moody’s also cited ‘increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector.’”

December 6 – Bloomberg (Evelyn Yu): “Moody’s… cut its outlook for eight Chinese banks to negative from stable, a day after unveiling a bearish stance on the nation’s sovereign bonds due to concern over the level of debt… The Chinese banks that Moody’s changed from negative to stable include three policy banks and five large state-owned commercial banks. ‘Moody’s expects support provided to financially-stressed entities to be more selective, contributing to protracted risks of further strains for state-owned enterprise and regional and local governments’…”

December 6 – Reuters (Marc Jones): “Moody’s put Hong Kong, Macau and swathes of China’s state-owned firms and banks on downgrade warnings… as it wasted little time in following up on an identical move the previous day on the mainland government’s ratings. Moody’s said the moves for Hong Kong and Macau reflected their tight political, institutional, economic and financial links with China under their ‘One Country, Two Systems’ arrangements. Hong Kong… hit out at the decision saying in a statement that its ties with Beijing were ‘a source of strength for long-term development.’ Moody’s added that, following imposition of a National Security Law in 2020 and changes to Hong Kong’s electoral system, it expected the erosion of the city’s autonomy ‘to continue incrementally’.”

December 5 – Bloomberg: “China sought to nip any hit to investor sentiment in the bud after a bearish credit outlook on debt threatened to exacerbate concerns over the financial health of the world’s second-largest economy. One day after Moody’s… cut its outlook for Chinese sovereign bonds to negative, the central bank dialed up its support for the yuan a notch and state media published a handful of articles citing experts who denounced Moody’s understanding of China’s economy. The finance ministry had earlier insisted the nation’s growth will be resilient. The multi-pronged defense of China’s debt status and financial system underscored how critical it is for Beijing to reassure investors and convince them the nation’s bond and asset markets are worth returning to.”

December 6 – Financial Times (Sun Yu): “Moody’s… advised staff in China to work from home ahead of its cut to the outlook for the country’s sovereign credit rating, a suggestion staff believed was prompted by concern over Beijing’s possible reaction… The move by the US rating agency highlights the unease of many foreign companies doing business in the world’s second-largest economy, where some have suffered police raids, exit bans for staff and arrests amid tensions between China and the US and its allies. Some Moody’s department heads in the country told associates on Friday that non-administrative staff in Beijing and Shanghai should not go into the office this week…”

December 7 – Reuters (Joe Cash): “China’s exports grew for the first time in six months in November, suggesting factories in the world’s second-largest economy are attracting buyers through discount pricing to get over a prolonged slump in demand… Exports grew 0.5% from a year earlier in November…, compared with a 6.4% fall in October and beating the 1.1% drop expected… Imports fell 0.6%, dashing forecasts for a 3.3% increase and swinging from a 3.0% jump last month.”

December 4 – Reuters (Clare Jim and Xie Yu): “China Evergrande Group… said it has been granted an adjournment of a court hearing into a liquidation petition to Jan. 29, giving the embattled property developer time to finalise a revamped offshore debt-restructuring plan. The decision came as the world’s most indebted developer with more than $300 billion in liabilities sought adjournment unexpectedly unopposed by the petitioner’s lawyer.”

December 5 – New York Times (Alexandra Stevenson): “In January, more than 100 financial sleuths were dispatched to the Guangzhou headquarters of China Evergrande Group, a real estate giant that had defaulted a year earlier under $300 billion of debt. Its longtime auditor had just resigned, and a nation of home buyers had directed its ire at Evergrande. Police on watch for protesters stood guard outside the building… After six months of work, the auditors reported that Evergrande had lost $81 billion over the prior two years, vastly more than expected. But they still had questions. Some records they had requested from Evergrande were incomplete. Numbers were missing. Important accounting errors or misstatements may have gone undetected. How had things at Evergrande — once one of China’s most successful companies — gone so wrong?”

December 3 – Bloomberg: “The analyst who predicted the troubles that cascaded through China’s regional banks four years ago now has a similar warning for the nation’s $2.9 trillion trust industry. Many of these firms are ‘deeply distressed, potentially with their capital solvency at risk,’ said Jason Bedford, a former analyst with Bridgewater Associates and UBS Group AG. Bedford made his name by issuing early warnings about China’s smaller banks after combing through nearly 250 financial statements. He’s now done the same for China’s trust firms, a corner of the country’s shadow banking sector that can offer returns several times that of a bank deposit. Of the 55 trust companies that issued financial statements for 2022, 14 reported non-performing and special mention assets that topped one third of their total assets… Many of the 13 firms that didn’t report could also be in trouble, he said.”

December 6 – Wall Street Journal (Rebecca Feng and Cao Li): “China is trying to defuse a financial time bomb that could severely damage its banking system. Cities and provinces have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures. No one knows what the actual total is, but it has become abundantly clear over the past year that local governments’ debt levels have become unsustainable.”

December 4 – Financial Times (Sun Yu): “Defaults by Chinese borrowers have surged to a record high since the outbreak of the coronavirus pandemic, highlighting the depth of the country’s economic downturn and the obstacles to a full recovery. A total of 8.54mn people, most of them between the ages of 18 and 59, are officially blacklisted by authorities after missing payments on everything from home mortgages to business loans, according to local courts. That figure, equivalent to about 1% of working-age Chinese adults, is up from 5.7mn defaulters in early 2020…”

December 4 – Financial Times (Editorial Board): “A sharp rise in Chinese consumers defaulting is the latest in a lengthening list of ailments afflicting the world’s second-largest economy. The number of people blacklisted for missing payments on everything from mortgages to business loans has risen to a record 8.54mn, from 5.7mn in early 2020. This number still only accounts for about 1% of the working-age population. But the rate of increase shows that even since China rolled back its pandemic lockdown about a year ago, rising financial distress at the individual level is contributing to stiff headwinds that are frustrating a broad recovery in consumer activity.”

December 4 – Bloomberg (Ailing Tan): “China’s offshore corporate-bond defaults have increased to $51.9 billion so far this year…, including 101 dollar-denominated bonds, 5 Hong Kong dollar-denominated notes and 3 dim-sum bonds.”

December 4 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity expanded at a quicker pace in November, a private-sector survey showed…, as the upturn in new businesses were the best seen for three months amid reports of firmer market conditions… The Caixin/S&P Global services purchasing managers’ index (PMI) rose to a three-month high of 51.5 in November from October’s 50.4, but it remained softer than the long-run series average.”

December 6 – Reuters (Colleen Howe): “China has started commercial operations at a new generation nuclear reactor that is the first of its kind in the world, state media said… Compared with previous reactors, the fourth generation Shidaowan plant in China’s northern Shandong province is designed to use fuel more efficiently and improve its economics, safety and environmental footprint as China turns to nuclear power to try to meet carbon emissions goals.”

Central Banker Watch:

December 4 – Reuters (Marc Jones): “Global central bank umbrella body, the BIS, eased its hardline stance on inflation on Monday, calling recent progress encouraging, but stressed that central banks were not out of the woods yet. Global economic data has begun to show a clear trend that multi-decade highs in inflation — caused by the rebound from the COVID-19 pandemic and spike in energy prices — are in the rear-view mirror… ‘The outlook has improved but the key point we have to bear in mind is that we are not out of the woods and that the job has to be done,’ Claudio Borio, the head of BIS’s monetary and economics unit, said.”

December 6 – Reuters (Steve Scherer and David Ljunggren): “The Bank of Canada (BoC)… held its key overnight rate at 5% and left the door open to another hike, saying it was still concerned about inflation while acknowledging an economic slowdown and a general easing of prices. The central bank raised rates by a quarter point in both June and July to a 22-year high and has left them on hold in the three policy-setting meetings since. Inflation slowed to 3.1% in October, down from a peak of more than 8% last year, but it has remained above the bank’s 2% target for 31 months. ‘Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,’ the BoC said in an unusually curt, five-paragraph statement. It said it wanted to see a ‘further and sustained easing in core inflation.’”

December 5 – Bloomberg (Zoe Schneeweiss and James Hirai): “One of the European Central Bank’s most hawkish officials said inflation is showing a ‘remarkable’ slowdown, a U-turn prompting markets to ramp up bets on an interest-rate cut as early as March. Executive Board member Isabel Schnabel… said that the consumer-price data released last week now make another hike in borrowing costs ‘rather unlikely,’ and refused to be drawn on the prospect that a reduction could even transpire within six months.”

December 6 – Bloomberg (Alexander Weber): “European Central Bank Governing Council member Peter Kazimir pushed back against market bets on an interest-rate cut as soon as the first quarter of next year. The Slovak official said he agreed with ECB Executive Board member Isabel Schnabel that ‘incoming inflation data support the idea that additional tightening won’t be needed,’ according to a post on the platform X. ‘However, expecting a cut in Q1/24 is science fiction.’”

December 6 – Reuters (William Horobin): “The European Central Bank has finished raising interest rates unless there are major surprises and may look at cuts at some point in 2024, Governing Council member Francois Villeroy de Galhau said. ‘Our decisions to increase interest rates are fully playing their role as a remedy against the disease that is inflation,’ Villeroy said… ‘This is why, barring any shock, there will be no further increase in our rates — the question of a reduction may arise in 2024, but not now.’”

December 4 – Reuters (Stella Qiu): “Australia’s central bank held interest rates steady… as expected, buying it more time to assess the state of the economy and decide whether to tighten further next year even as the U.S. and Europe are seen as almost certain to ease. Wrapping up its December policy meeting, the Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35%, adding economic data received since November – when it hiked by a quarter-point – had been broadly in line with expectations.”

Global Bubble Watch:

December 6 – Bloomberg (Aline Oyamada): “Investors are betting that Europe will lead the world’s largest central banks on interest-rate cuts after one of the region’s most hawkish policymakers described a slowdown in inflation as ‘encouraging.’ Markets are fully pricing six quarter-point rate cuts by the European Central Bank in 2024 for the first time, a move that would take the key rate down 150 bps to 2.5%. There’s also an almost 90% chance of the easing cycle starting in the first quarter of next year, a scenario that was barely contemplated just three weeks ago.”

December 5 – Bloomberg (Lisa Du): “Japanese investors are spending the most in two decades to buy up properties overseas, undeterred by the global real estate slump and the yen’s decline to a 50-year low. A Manhattan skyscraper, data centers in Toronto and office buildings in London are among the assets that Japanese companies and pension funds have scooped up this year. Flush with cash and in the only developed economy with access to rock-bottom financing rates, their purchases are giving some relief to the market as rising office vacancies and interest rates keep other buyers away.”

Europe Watch:

December 5 – Reuters (Jonathan Cable): “The downturn in euro zone business activity eased last month but still indicates the bloc’s economy will contract again this quarter as the dominant services industry continues to struggle to generate demand, a survey showed… HCOB’s composite PMI, compiled by S&P Global and seen as a good guide of overall economic health, rose to 47.6 from October’s near three-year low of 46.5 and coming in above a 47.1 preliminary estimate.”

December 7 – Bloomberg (Sonja Wind and Alexander Weber): “Industrial production in Germany and Italy began the final quarter of the year with a stumble after France and Spain reported similar outcomes, pointing to a possible recession in the region. Output in Europe’s biggest economy fell 0.4% in October from the previous month to the lowest level since August 2020… In Italy, production declined 0.2% from September.”

December 6 – Reuters (Crispian Balmer and Angelo Amante): “Italy has officially informed China that it is quitting the Belt and Road Initiative (BRI), dismissing fears the move might sour relations and damage the Italian economy, government sources said… Italy in 2019 became the first and so far only major Western nation to join the trade and investment programme, ignoring warnings from the United States that it might let China take control of sensitive technologies and vital infrastructure.”

Japan Watch:

December 6 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “Bank of Japan Governor Kazuo Ueda met Prime Minister Fumio Kishida to explain monetary policy ahead of the central bank’s next decision later this month as speculation continues to simmer over the likelihood of near-term policy moves… ‘I can’t talk about the details but we exchanged opinions about economic and financial conditions,’ Ueda said. ‘I explained my basic thinking on monetary policy in line with what I said in parliament this morning.’”

December 5 – Reuters (Leika Kihara and Takahiko Wada): “Bank of Japan Deputy Governor Ryozo Himino said an exit from ultra-loose monetary policy, if done properly, will reap benefits for the economy, signalling that an end to decades of super-low interest rates may be nearing. While signs from various data remain patchy, Japan is making ‘solid progress’ in shifting firms away from practices that kept price and wage growth subdued, Himino said in a speech… ‘The BOJ should carefully monitor the evolution of wages and prices, judge the timing of the exit, and design its process,’ he said… ‘If this is done properly, we could achieve a positive outcome from the exit because a wide range of households and firms would benefit’ from rising wages and prices, he said.”

December 7 – Bloomberg (Yoshiaki Nohara): “Japan’s economy shrank at the sharpest pace since the height of the pandemic, an outcome that complicates the policy path for the Bank of Japan amid soaring speculation it is edging closer to scrapping the world’s last negative rate regime. Gross domestic product contracted at an annualized pace of 2.9% in the three months through September from the previous quarter as households reined in spending, revised figures from the Cabinet Office showed…”

December 4 – Bloomberg (Erica Yokoyama): “Inflation in Tokyo cooled to the slowest pace in over a year, a development that supports the Bank of Japan’s view that price pressures are weakening for now and its continued caution over a tightening of policy. Consumer prices excluding fresh food rose 2.3% in November from the prior year in the capital, largely due to falling electricity and gas charges and smaller gains in processed food prices… Inflation slowed from 2.7% in October, and came in below economists’ forecast of 2.4%.”

December 5 – Reuters (Tetsushi Kajimoto): “Sentiment at big Japanese manufacturers surged, improving for a second straight month as the auto sector continued to recover from last year’s semiconductor shortage and supply chain woes, a monthly Reuters Tankan survey found. The sentiment index for manufacturers stood at plus 12 in December compared with plus 6 the previous month, according to the survey which was conducted Nov. 21-Dec. 1.”

Levered Speculation Watch:

December 8 – Reuters (Carolina Mandl): “A U.S. market rally in equities and bonds in November led global hedge funds to post their best monthly performance since January, although it caused losses to bearish macro strategies…, Hedge Fund Research (HFR) said… Overall, the hedge fund industry posted gains of 2.2% in November and is up 4.35% in the year… Equity hedge funds led the industry performance among all four strategies tracked by HFR and rose 4.1% in November. Still, they lagged the S&P 500… Event-driven hedge funds, which bet on merger activity and activist campaigns, rose 3.6% last month. They are the year’s best-performing category, with gains of 6.4%. Relative value hedge funds… rose 1.5% in the month, with 5.6% in gains in the year. Surprised by the markets rally, macro hedge funds were the sole strategy to post losses in November, down 1.6% in the month and 1.8% year-to-date.”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 5 – Reuters (Leigh Thomas): “Teenagers’ mathematics and reading skills are in an unprecedented decline across dozens of countries and COVID school closures are only partly to be blamed, the OECD said on Tuesday in its latest survey of global learning standards. The… Organisation for Economic Cooperation and Development said it had seen some of the steepest drops in performance since 2000 when it began its usually triennial tests of 15-year-olds reading, maths and science skills. Nearly 700,000 youths took the two-hour test last year in the OECD’s 38 mostly developed country members and 44-non members for the latest study…”

December 6 – CNN (Rachel Ramirez): “Earth’s temperature was off the charts this year, and scientists just confirmed what much of planet already felt coming: 2023 will officially be the hottest year on record. The analysis from the European Union’s Copernicus Climate Change Service found this year’s global temperature will be more than 1.4 degrees Celsius warmer than pre-industrial levels — close to the 1.5-degree threshold in the Paris climate agreement, and beyond which scientists say humans and ecosystems will struggle to adapt. Every month since June has been the hottest such month on record, and November piled on. The month was roughly 1.75 degrees warmer than pre-industrial levels, and two days soared beyond 2 degrees…”

December 5 – Bloomberg (Olivia Rudgard): “Five major global ‘tipping points’ are in danger of being crossed at current levels of warming, a new study warns, leaving humanity at an inflection point between two potential futures. An international team of more than 200 researchers identified 26 natural processes or features at risk of being suddenly and irreversibly disrupted by climate change, including ice sheets, tropical rainforests, mountain glaciers, ocean currents and coral reefs. They found that the mass death of warm-water coral reefs is likely at current levels of warming (1.2C), while four other processes — the collapse of Greenland and West Antarctic ice sheets, disruption of the North Atlantic subpolar gyre circulation and abrupt thawing of permafrost regions — are considered possible.”

December 4 – Bloomberg (Ruth Liao): “The Panama Canal… is being squeezed shut by drought and forcing shippers worldwide to face a painful choice. They can wait in line for days or weeks, as low water levels limit the number of ships passing through the 50-mile waterway, carrying cars, consumer goods, fruit and fuel. They can pay millions of dollars to jump ahead in the queue, if a ship with a booked reservation drops out. Or they can sail an entire continent out of the way, sending their ships around the southern tips of Africa and South America, or through the busy Suez Canal. Each choice adds cost, at a time when governments around the world are struggling to tame inflation. And the bottleneck will only worsen in the coming months as Panama enters its annual dry season…”

December 6 – Wall Street Journal (Eric Niiler): “A water hog is lurking in your crypto wallet. Bitcoin-mining operations slurp up billions of gallons of water globally each year. Estimates vary, but the annual footprint is projected to surpass 591 billion gallons of water this year, according to an article published… in the peer-reviewed journal Cell Reports Sustainability. For comparison, New York City residents and businesses consumed 403 billion gallons in 2022… Miners use water directly to cool their computer servers and indirectly by running both computers and air conditioning systems powered by gas- and coal-fired power plants that require cooling water. Some of the cooling water used by power plants evaporates and is no longer available for anything else. Bitcoin mining requires massive amounts of energy.”

Geopolitical Watch:

December 6 – Financial Times (Joe Daniels and Michael Stott): “Venezuela’s revolutionary socialist President Nicolás Maduro has ordered state companies to exploit oil deposits and mines in territory run by Guyana after boasting of an ‘overwhelming’ people’s mandate to pursue a longstanding claim to two-thirds of its neighbour’s land. Maduro’s bellicose speech on Tuesday night has increased fears in Guyana that Venezuela might use force to seize the remote territory of Essequibo, which controls access to a rich oilfield.”

December 6 – Reuters (Mayela Armas, Deisy Buitrago, Kiana Wilburg and Sabrina Valle): “Venezuelan President Nicolas Maduro said… he would authorize oil exploration in an area subject to a dispute with Guyana, which said it would report his comments to the United Nations and the International Court of Justice (ICJ). Maduro’s pledge to permit development around the Esequibo river came after his government held a referendum over the weekend where voters rejected the ICJ’s jurisdiction over the disagreement and backed creating a new state in the territory.”

December 6 – CBS: “Guyana’s President Irfaan Ali said the country is taking every necessary step to protect itself from Venezuela, which has ordered its state-owned companies to explore and exploit oil and minerals in Guyana’s vast and resource-rich Essequibo region that it considers its own… Ali shared similar sentiments in an… interview with CBS News, explaining that Guyana is preparing to defend the borders with Venezuela so they remain as they are. When asked if he has requested military assistance, Ali said his government is reaching out to allies and regional partners, some of which Guyana has defense agreements with, to protect the Essequibo region, which makes up two-thirds of the country.”

December 7 – Reuters (Ben Blanchard): “Taiwan said on Friday that 12 Chinese fighter jets and a suspected weather balloon had crossed the Taiwan Strait’s sensitive median line, in a ratcheting up of tensions about a month before the island’s presidential election… Taiwan holds presidential and parliamentary polls on Jan. 13 and campaigning has kicked into high gear with how the next government handles relations with China a major point of contention.”

December 4 – Reuters (Gabriela Baczynska and Andrew Gray): “Hungarian Prime Minister Viktor Orban demanded… that a summit of European Union leaders next week avoid any decision on Ukraine’s coveted goal of getting a green light for membership talks even as the country fights Russia’s invasion. Orban, who has maintained ties with Moscow…, has been proclaiming for weeks that Kyiv is not ready to begin EU accession negotiations. His stance is at odds with the view of the European Commission…, which recommended last month that the bloc’s leaders give Kyiv the thumbs-up to begin talks as soon as it has met some final conditions.”

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